Earnings Growth Not All It Seems At PacWest Bancorp

My latest filing season find is a regional bank with misleading earnings growth. I pulled this highlight from last week’s research of 409 10-K filings that produced 54,383 data points. The analyst team used this data to make 8,989 forensic accounting adjustments with a dollar value of $1.3 trillion. The adjustments were applied as follows:

3,837 income statement adjustments with a total value of $99 billion

3,693 balance sheet adjustments with a total value of $513 billion

1,459 valuation adjustments with a total value of $657 billion

Figure 1: Filing Season Diligence for Week of March 5-10

New Constructs, LLC

Filing Season Finds: Week of 3/5-3/10

Every year in this six-week stretch from mid-February through the end of March, my firm parses and analyzes roughly 2,000 10-Ks to update our models for companies with 12/31 and 1/31 fiscal year ends. This effort is made possible by the combination of trained human analysts with what I call the “Robo-Analyst,” research automation technology that uses machine learning and natural language processing to automate robust financial modeling.

On the balance sheet, PACW reported an $18 million (5% of net income) decrease to its loan and lease loss allowance. Notably, PACW’s gross loans and leases increased by 10% in 2017, so the company is assuming lower losses on a larger portfolio of loans and leases.

On page 56, PACW discloses that it earned $8 million (2% of net income) from legal settlements with former borrowers and other parties.